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Strong Aussie dollar blamed for several sector woes

ELEANOR HALL: While the economy as a whole may be slowing slightly the manufacturing, tourism and education sectors are struggling and blaming the high Australian dollar for their woes.

But a senior Reserve Bank official says there's no sign the local currency is over-valued.

The RBA's deputy governor, Phillip Lowe, told a manufacturing forum that a sustained rise in unemployment would be the clearest indicator that the dollar is too high, and that hasn't happened.

But there are other signs of weakness; as Business reporter Michael Janda reports.

MICHAEL JANDA: The Australian economy may be growing, but many sectors and states are doing it tough.

But the Reserve Bank's deputy governor, Phillip Lowe, says such structural change, where some industries grow at the expense of others, is nothing new.

PHILLIP LOWE: If you go back to the 1960s a little over 50 per cent of employment was in the services sector. Today that figure is over 75 per cent. And as you can see the shares of manufacturing and agriculture have steadily declined over the past 50 or 60 years.

MICHAEL JANDA: Dr Lowe was speaking to a forum in Sydney hosted by the Australian Industry Group, which largely represents manufacturers. And he had a blunt message for the audience.

PHILLIP LOWE: Realistically, Australia cannot hope to be a large scale producer of relatively standardised plain vanilla manufactured goods for the world market. But what we can be is a supplier of manufactured goods that build on our comparative advantages, our educated workforce, our ability to design and manufacture specialised equipment, our reputation for high quality food, our research and development skills and our expertise in mining related equipment.

MICHAEL JANDA: That message is borne out by the change in manufacturing exports over the past few years with cars, metals and building goods declining, while professional, scientific and specialised machinery sales overseas have been on the rise.

Overall, Phillip Lowe says those forces have been balancing out quite well.

PHILLIP LOWE: GDP growth is close to trend, inflation is consistent with the target, interest rates are around average and unemployment is low.

MICHAEL JANDA: And Dr Lowe says it's the low unemployment rate, which has remained below 5.5 per cent for the last two years, that indicates the Australian dollar isn't over-valued.

PHILLIP LOWE: If the unemployment rate were to rise persistently, it might suggest that the contractionary effect of the high exchange rate was more than offsetting the expansionary effect of the investment boom in the terms of trade.

If this were to turn out to be the case, monetary policy would have the flexibility to respond, provided that the inflation outlook remained benign.

MICHAEL JANDA: In plain English, that means the Reserve Bank's quite comfortable with the current level of the dollar and interest rates, and won't intervene unless unemployment climbs noticeably.

One industry that's not comfortable with interest rates is construction.

The Australian Industry Group and Housing Industry Association put together a monthly index on the sector's growth and for the 21st consecutive month construction activity fell in February.

Peter Burn is the industry group's director of public policy.

PETER BURN: It fell 4.2 points to 35.6, and as you get further away from 50 you are getting a faster pace of decline.

MICHAEL JANDA: But he says the continued falls have more to do with a drop in public spending and a lack of household confidence than they do with the current level of interest rates.

PETER BURN: Current interest rates in the market are around about the average of where they have been for the last 20 years or so. So, in themselves, they're not probably detracting from activity, certainly they're not a factor in the residential construction sector because households can certainly get a mortgage at the rates which they are quite familiar with.

MICHAEL JANDA: And if the Reserve Bank is waiting for rising unemployment as a sign the dollar is too high, Peter Burn says the construction industry is likely to contribute to the jobless queues.

PETER BURN: The new order sub-index of our levels of construction activity were also weak and also fell but that tends to point to where things are going to go over the next couple of months. So people aren't thinking that there is going to be a great big pick up and in that context also employment in the sector seems to be lower.

MICHAEL JANDA; The question will be whether those workers can find jobs in the mines or providing services to those who are directly exposed to the mining sectors booming income.